OREANDA-NEWS. December 19, 2011. Renaissance Capital, the leading emerging markets investment bank, has issued a groundbreaking report analysing the eurozone crisis and the reasons that prompted it.

When I’m 67, authored by Charles Robertson, Renaissance Capital’s Global Chief Economist, and the Firm’s award-winning global research team, argues that excessive public pension spending (accounting for nearly one-third of tax revenues in Italy, Greece and Japan), worsening demographics and a lack of private pension provision have served as key causes of the present eurozone fiscal crisis. Three of the governments in most trouble today spend over 10% of GDP on pension provision, notes the report, which also highlights that to bring Italian pension spending down to German spending levels would require pension payments to be cut by one-third. Given the 12mn Italian pensioners (roughly one-quarter of voters), it is little wonder that former-premier Silvio Berlusconi and his allies were so reluctant to address the pension issue, the report says.

Since Lennon and McCartney wrote When I’m Sixty-Four, the effective retirement age in France has fallen by nine years, to 59, and by five years in Italy and Greece. Renaissance Capital believes the eurozone crisis has been brought about by a combination of these falls.

Higher retirement ages of at least 67 or higher and less pension provision seem inevitable, Renaissance notes. The Firm expects inter-generational political conflict to replace class conflict in the eurozone; in Italy, analysts believe the large, voting population of pensioners may yet resist southern European reforms, and notes that Germany and Ireland had better demographics when they advanced reforms.

“Emerging market experience tells us that just two years of harsh reforms can make a big difference,” says Charles Robertson. “We need those two years. In the short term, we believe the eurozone has no choice but to try reform in southern Europe, backed by IMF/European Central Bank support.”

Renaissance’s favoured markets today are Russia, Nigeria and South Africa. Anglo-Saxon and Nordic countries are pension (and bond) safe havens in the developed market world, but it will surprise few that Renaissance sees emerging markets as the safest haven of all. There are exceptions, such as Hungary and Argentina, which have taken significant steps backwards; but, the report notes, there are many more positive examples, such as South Africa and Chile, with private pension funds above 60% of GDP. Zimbabwe has better private pension provision than Japan, Poland is stronger than Brazil and Nigeria is better than South Korea.

Renaissance expects Nigerian pension funds to grow by USD 13bn by 2015, enough to buy the entire stock market outright at 2011 prices. Sub-Saharan African pension funds are not only larger than we expected, but with 10-15 workers per pensioner, demographics suggest African GDP growth rates will power past Asia in the coming decades, offering the current generation a better retirement than that offered by low Asian public or private pension provision.

The report sees the best Emerging European story in Kazakhstan, where pension funds could own all the country’s debt and equity assets, and where demographics are excellent. Turkey is also in a strong position, but would do better still if it encouraged more cash into local pension funds. Russia is in a good position today, as pension spending has only recently risen above that of Japan and Belgium, but is on course to follow the Italian model if more savings are not channelled into local pension funds.

Most emerging market countries are, fortunately, following the Anglo-Saxon/Nordic-private-pension model, rather than the bankrupt Southern European public-pension-provision model, concludes the report.

“When I’m 67 may be a statement of optimism in emerging markets, as it could be for all of us if our pension funds shift assets from 2% US treasuries to higher-growth EM economics,” adds Charles Robertson.